INCOME TAX

RBI/ECGC bonds issued to project exporters who have executed projects in Iraq--Applicability of the condition regarding bringing of convertible foreign exchange into India for availing of the tax incentive under section 80HHB.

Circular No. 711

Dated 24/7/1995

Section 80HHB of the Income-tax Act provides for a deduction of 50 per cent. of profits derived from projects abroad, in the computation of taxable income. The incentive is subject to the condition that 50 per cent. of profits derived from such projects be brought into India in convertible foreign exchange.

2. The Department of Economic Affairs has pointed out the hardship faced by project exporters who have executed projects in Iraq. In their case, RBI and ECGC have decided to issue bonds by way of settlement of claims pending because of the Gulf War. Since the bonds will be issued in local currency, the project exporters apprehend that they may not get the benefit under section 80HHB.

3. The Department of Economic Affairs have clarified that the RBI/ECGC bonds are in place of unrealised funds of project exporters in Iraq. The funds are realisable from Iraq and credited into EXIM Bank's account with the Central Bank of Iraq. They will be repatriated into India only after lifting of the U. N. sanction, as per the terms of Deferred Payment Agreement entered into by the Government of India and the Government of Iraq.

4. The Central Board of Direct Taxes have examined the matter in consultation with the Department of Economic Affairs. Since the payments received in the shape of bonds are in lieu of foreign exchange realisation from the project exports and the foreign exchange will eventually be repatriated into India by the EXIM Bank after the lifting of the U. N. sanction, the RBI/ECGC bonds issued by way of settlement of claims of projects in Iraq will be treated as convertible foreign exchange brought into India for the purposes of section 80HHB.

5. The request for extension of the period of six months for bringing in convertible foreign exchange into India may be liberally allowed by the Chief Commissioner/Commissioner of Income-tax.

(Sd.) Keshav Dev Ranjan,

Secretary,

Central Board of Direct Taxes.